03
Jan
12

Revenue recognition exposure draft (topic 605) – impact to non-profits

Welcome back from the holidays.  Did you finally make time to read through the 217 page revised revenue exposure draft issued recently on November 14, 2011?  Ok, me neither.  But with the help of a colleague, I made some progress skimming this draft, and I want to share some initial thoughts with you.

 Our skimming focused on revenue recognition for government grants which historically have been accounted for as exchange transactions.  This is because contributions are out of scope for this proposed standard (as are any other contracts which are in the scope of other standards, for example, insurance contracts or lease contracts).

The new draft standards main provisions are:

  • Step 1: Identify the contract with a customer.
  • Step 2: Identify the separate performance obligations in the contract.
  • Step 3: Determine the transaction price.
  • Step 4: Allocate the transaction price to the separate performance obligations in the contract.
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

So, does this standard apply to government grants?  First, I wonder if government grants accounted for as exchange transactions could also be out of scope for this proposed standard – do they fall under the scope of other standards, maybe ASC 958-605?  I haven’t had time to research that yet, but if they are scoped out because they are in the scope of other standards, language within this exposure draft seems to conflict with this conclusion.  This exposure draft notes that when a not-for-profit entity enters into a contract with a customer for a social benefit or charitable purpose, not-for-profit entities should be exempt from applying certain tests within this standard.  On the surface, this reference to contracts for social benefit or charitable purpose sounds like the FASB is scoping government grants into this draft by the fact that they are exempting certain steps for these specific contracts.

So what if government grants are under this draft standard?  Does that mean sweeping changes for government grant revenue recognition?  I’m not so sure that it does.  Here are some initial thoughts on where the steps lead when applied to government grants: 

 Step 1: Identify the contract with a customer

  • No news here, this is pretty straightforward.

 Step 2: Identify the separate performance obligations in the contract.

  • There is a difference between distinct services or bundled services…I’m not sure yet where I land on this yet.  Do you?

 Step 3: Determine the transaction price.

  • Paragraph 31 of the exposure draft says “An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (that is, an asset) to a customer.  An asset is transferred when (or as) the customer obtains control of that asset.” On the surface, I don’t see how the government obtains control of a social benefit service.  This feels a bit like forcing a round peg in a square hole…

 Step 4: Allocate the transaction price to the separate performance obligations in the contract.

  • It looks like performance obligations for government grants are satisfied over time.  Paragraph 35-36 note that Performance obligations are satisfied over time if an entity’s performance does not create an asset with an alternative use to the entity and either one of the following is met:
  1. The customer simultaneously receives and consumes the benefits of the entity’s performance as the entity performs.
  2. The entity has a right to payment for performance completed to date, and it expects to fulfill the contract as promised.

 Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

  • The control reference surfaces again here – “an entity shall exclude from a measure of progress any goods or services for which the entity does not transfer control to the customer.”  Transfer of control of a social benefit service may be difficult to define, I wonder whether there is any impact to the timing of government grant revenue recognition?
  • There are two methods noted under step 5 for revenue recognition.  Measuring progress towards satisfying a performance obligation may include an output method or input method.  The input method includes recognizing revenue on a basis of the entity’s efforts or inputs to the satisfaction of a performance obligation (for example, costs incurred).

Where does that leave us?  With several questions to consider…

  • Do exchange transactions fall within the scope of another standard?
  • How do we define when our “customer” (the government) obtains control of the promised service (asset)?
  • What about situations where we don’t fulfill the performance obligations(s) or only partially fulfill them? 
  • What about situations where someone else outside of the organization is fulfilling the grant, i.e. subgranting?

If you can connect the dots on the control phrases without any unforeseen problems, it would seem as though revenue may be recognized over time, and that it may be recognized as costs are incurred (or expended for grant purposes).

 I’m sure we’ll all understand more as we unpack this exposure draft.  In the meantime, I’m going to continue reviewing this exposure draft to determine whether its necessary to comment before the March 13 deadline.  My one request today?  I would like to request FASB not make the same oversight in this Revenue Recognition standard they made in the Fair Value standard – my request is to please include examples for non-profits!

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